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Bank Overdraft Fee Litigation and Regulatory Developments

Lessons Learned from Recent Litigation and Settlements, Preparing for Increased Regulatory Scrutiny, and Minimizing Liability Exposure

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WEDNESDAY, JULY 18, 2012

Presenting a live 90-minute webinar with interactive Q&A

Kenneth C. Johnston, Director, Kane Russell Coleman & Logan, Dallas Austin K. Brown, Associate, Skadden Arps Slate Meagher & Flom, Washington, D.C.

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Overdraft Update

Litigation and Regulatory Developments

July 18, 2012

Kenneth C. Johnston

3700 Thanksgiving Tower 1601 Elm Street Dallas, Texas 75201 (214) 777-4200 kjohnston@krcl.com

"I warn you, Sir! The discourtesy of this bank is beyond all limits. One word more and I — I withdraw my overdraft!”

Punch Magazine, Volume 152, June 27, 1917

Roadmap

1. Overview of challenged high-to-low posting practices 2. Recent developments in the In re Checking Account Overdraft Litigation (MDL 2036) 3. Recent regulatory developments

• Brief mention—Mr. Barloon will more comprehensively address the

regulatory environment

4. What happens next?

6

The core issue: High to low posting

This means that when a bank receives multiple items for payment on a customer's account, the bank will pay the largest-sum items first and the smallest-sum items last. Historically, many banks and regulators supported this practice to ensure that the most important items (and typically most expensive), such as a mortgage or rent payment, would be paid. In practice, "high-to-low" posting may lead to more overdraft fees than would otherwise be assessed if the bank had followed a "low-to-high" or chronological posting order.

7

High to low posting: related challenged practices

 Commingling: Commingling debits entails a bank's aggregation of various debit transactions into a single batch versus posting in a pre- specified order (i.e., payment of all checks, then payment of all debit-card transactions, etc.).  The shadow line or credit matrix: A "shadow line" refers to a credit available to cover insufficient funds availability on a checking account.

8

Plaintiffs’ allegations

 High-to-low posting is per se “unfair” or “unconscionable”  Consumer opt-out rights  Inadequate notice  Misleading advertising

9

Plaintiffs’ legal theories of recovery

 Breach of Contract Based on Implied Covenant of Good Faith and Fair Dealing  Unjust Enrichment  Conversion  State Statutory Claims  Unconscionability

10

The first case: Gutierrez v. Wells Fargo Bank (N.D. Cal.)

 Plaintiffs commenced class-action litigation in November, 2007.  On August 10, 2010, following a two-week bench trial, the United States District Court for the Northern District of California found Wells Fargo’s posting practices were unfair and deceptive, in violation of section 17200 of the California Business and Professions Code. Gutierrez v. Wells Fargo Bank, N.A., 730 F. Supp. 2d 1080 (N.D. Cal. 2010).

11

Gutierrez v. Wells Fargo Bank (N.D. Cal.) (con’t)

 Critical issue: Court found that Wells Fargo promoted chronological posting, contrary to disclosures in its deposit agreements.

• For more information on the promoted/non-promoted distinction,

refer to the 2005 Joint Guidance on Overdraft Protection Programs, available at: http://www.federalreserve.gov/boarddocs/press/bcreg/2005/20050 218/attachment.pdf

 Court endorsed plaintiff’s expert’s calculation of close to $203 million in damages.

12

Current status of Gutierrez

 Appeal pending before the Ninth Circuit Court of Appeals.  Arguments on appeal:

• Preemption under National Bank Act and OCC regulations.
• Posting practices not unfair or fraudulent under California law.
• District Court overstated amount of damages due to plaintiffs.

 Ninth Circuit heard oral argument on May 15, 2012.

• Oral argument available at:

http://www.ca9.uscourts.gov/media/view_subpage.php?pk_id=0000 009188

13

In re Checking Account Overdraft Litigation, MDL

• No. 2036 (S.D. Fla.)

 During pendency of Gutierrez, plaintiffs began bringing numerous parallel class actions against other banks.  In June of 2009, the Judicial Panel on Multidistrict Litigation (“JPML”) began consolidating overdraft class actions in the Southern District of Florida, for pre-trial proceedings before Judge James Lawrence King.  The JPML found that “while there will be some unique questions

• f fact from bank-to-bank, these actions share sufficient factual

questions relating to industry-wide bank posting policies and procedures to warrant centralization of all actions in one MDL docket.” MDL 2036, Doc. No. 1.

14

Significant Developments in MDL 2036

 Ruling on federal preemption  Rulings on arbitration clauses  Rulings on class certification  Rulings on Daubert motions to strike experts  Settlements  Issues deferred: summary judgment motions  Remand and trial

15

Federal Conflict Preemption

• Plaintiffs are not challenging the banks' right to charge overdraft

fees but rather are challenging the banks' practice of reordering transactions to maximize overdraft fees.

Kane Russell Coleman & Logan PC

Defendants’ Argument: Plaintiffs’ Argument:

• Activities of national banks in conducting the "business of

banking" are subject to exclusive federal regulation.

• Defendants rely on OCC Regulations § 7.4002 and § 7.4007 and

OCC Interpretative Letter 997.

16

MDL 2036 Preemption Ruling

• State laws of general applicability are not preempted.
• Plaintiffs are not challenging a bank's fundamental right

to impose overdraft fees.

• As alleged, the Plaintiffs' contract and tort claims do not

more than "incidentally affect the exercise of national banks' deposit taking powers.”

• Section 7.4002 gives banks the right to charge overdraft

fees, but it does not authorize banks to ignore general contract or tort law.

• Motion to Dismiss on federal preemption grounds DENIED.

Kane Russell Coleman & Logan PC

17

Open Regulatory Issues

• Field preemption, e.g. Homeowner’s Loan Act: 12 U.S.C.

1461

• Truth in Savings Act : 12 U.S.C. 4301 (implemented by Reg

DD, 12 C.F.R. 230)

• TISA prohibits institutions from making any advertisement,

announcement, or solicitation relating to a deposit account that is inaccurate or misleading or that misrepresents their deposit contracts.

• Congress repealed the private right of action under TISA

Kane Russell Coleman & Logan PC

18

MDL 2036 Class Certification Rulings

• The MDL Court has granted every motion for class

certification presented thus far.

• The MDL Court has relied heavily on the injury and damages

calculations of plaintiffs’ expert, Arthur Olsen.

• The MDL Court has rejected arguments that certification

deprives the banks of the opportunity to present case- specific defenses, such as waiver or statute of limitations.

• The MDL Court has indicated that such case-specific

defenses can merely “be dealt with, if need be, during the claims process.” MDL Doc. No. 2697.

Kane Russell Coleman & Logan PC

19

Rule 23(f) Appeals

• Basic issues
• Proper application of Rule 23’s “rigorous analysis” requirement
• Consideration of individualized issues such as consumer behavior
• No single plausible posting order works in every consumer’s favor
• Commonality: even though uniform deposit agreements exist, did

each consumer suffer the same alleged injury?

• Recent subject matter jurisdiction inquiries from the Eleventh

Circuit

• Pleading of residency vs. citizenship for purposes of diversity
• Problems with class definition

Kane Russell Coleman & Logan PC

20

MDL 2036 Daubert Rulings

• The MDL Court has denied all Daubert motions to strike the

testimony of plaintiffs’ expert, Arthur Olsen.

• The MDL Court’s decisions have treated Olsen’s analysis as

uniform across all cases, beginning with the Gutierrez decision under California law. See, e.g., MDL Doc. No. 2801.

• However, the MDL Court has also recently denied Plaintiffs’

motion to strike Defendants’ experts. See MDL Doc. No. 2807.

• Is this the proper application of Daubert at the class

certification stage, in accord with Dukes and American Honda?

Kane Russell Coleman & Logan PC

21

MDL 2036 Arbitration Rulings and Reversals

• The MDL Court has denied banks’ motions to compel

arbitration, finding arbitration clauses in banks’ deposit agreements to be unconscionable. See, e.g., In re Checking Account Overdraft Litig., 734 F. Supp. 2d 1279 (S.D.

• Fla. 2010).
• The Eleventh Circuit, however, has reversed the MDL Court’s

rulings and remanded with instructions to enforce the banks’ arbitration clauses. See, e.g., In re Checking Account Overdraft Litig., 672 F.3d 1224 (11th. Cir. 2012).

• The Supreme Court’s decision in AT&T Mobility LLC v.

Concepcion, 563 U.S. ---, 131 S. Ct. 1740 (2011), has influenced the Eleventh Circuit’s arbitration decisions.

Kane Russell Coleman & Logan PC

22

MDL 2036 Settlements

• Following MDL Court’s class certification orders,

numerous banks have entered class settlements.

• Known settlements have varied from as low as $2.2MM to

as much as $410MM, depending on the widely varying sizes of the banks.

• Other banks continue to challenge plaintiffs’ claims on a

case-by-case basis, and have indicated a willingness to proceed to trial upon remand.

Kane Russell Coleman & Logan PC

23

MDL 2036: Issues Deferred

• MDL Court has focused on class certification, refusing thus far

to rule on a variety of substantive matters.

• MDL Court has denied without prejudice all Daubert motions.
• MDL Court has denied without prejudice the banks’ motions

for summary judgment.

• MDL Court has not ruled on defendants’ arguments regarding

the Truth in Savings Act.

• MDL Court denied banks’ motions to dismiss plaintiffs’ unjust

enrichment claims, even in light of express contracts.

Kane Russell Coleman & Logan PC

24

Remand issues looming large

• The MDL Court generally does not have authority to retain cases

transferred from other districts for trial proceedings. See Lexecon Inc. v. Milberg Weiss Bershad Hynes & Lerach, 523 U.S. 26 (1998).

• MDL proceedings are generally designed to resolve only

common issues of fact—not case-specific issues.

• Many pre-trial motions, such as motions in limine, are better

suited to discretion of the trial court.

• Thus far, the MDL Court has rejected scheduling proposals

considering remand and has not clarified its position on remand.

25

Developing MDL 2036 issues

• Do the class certification procedures and trial plans abridge

banks’ case-specific defenses, in violation of the Rules Enabling Act?

• What procedural alternatives do the trial courts have upon

remand from MDL 2036?

• Are the remand courts bound by the MDL Court’s orders?
• The JPML is no longer transferring tagalong cases into MDL 2036.

The JPML’s October 11, 2011 order states that the MDL litigation is “quite mature.”

26

Overdraft Cases to Consider

• Hassler v. Sovereign Bank, 374 F. App’x 341 (3rd Cir. 2010)

(unpublished) (affirming Rule 12(b)(6) dismissal of posting order claims based on contract theory).

• Shelley v. AmSouth Bank, 2000 WL 1121770 (S.D. Ala. July 24,

2000), aff’d Shelley v. AmSouth Bank, 247 F.3d 250 (11th Cir. 2001) (Truth in Savings Act only requires minimal disclosure of posting order policies).

• Class action cases filed after the effective date of Reg E’s opt-in

provisions in 2010.

27

Regulatory Developments: Overview

 2009: The Fed amends Reg E (12 CFR 205)  2010: FDIC Guidance  2011: OCC Guidance  2012: CFPB Proposals (expected)

28

Reg E

 Effective July 2010  Consumers must “opt-in” to overdraft protection for ATM and point-of-sale debit transactions (12 CFR 205.17(b))  Also includes various disclosure and notice requirements  Jurisdiction over regulation of Reg E transferred to the CFPB in October 2011  CFPB has already issued proposed rules for further Reg E amendments

29

FDIC Guidance

 Issued November 2010, implementation required by July 2011  Banks must monitor accounts and “take meaningful and effective action to limit use by customers” of overdraft protection

• For “excessive” users (seven or more overdrafts in a rolling 12 month

period), banks must take action, e.g. (i) contacting the customer to discuss alternatives, or (ii) giving the customer opportunity to opt-out

• Alternatives may be links to other accounts, overdraft lines of credit,
• r short-term loans

30

FDIC Guidance (con’t)

 Banks must impose daily limits on overdraft charges

• No explicit guidance is provided on what the limit may be;

indications suggest 3 per day or a specific dollar limit may be appropriate

 Banks must ensure that posting order does not maximize

• verdrafts
• Banks must review check-clearing procedures to ensure that they

“operate in a manner that avoids maximizing customer overdrafts and related fees”

• High-to-low posting is not a per se violation

31

FDIC Guidance (con’t)

 The guidance only applies to automated overdraft programs used for consumer—not business—accounts  Banks are not required to suspend the accounts of “excessive” users  FDIC has provided answers to FAQs at www.fdic.gov/news/conferences/overdraft/FAQ.html

32

OCC Guidance

 Issued June, 2011 in “proposed” form; not finalized  Banks must disclose terms of overdraft protection program as well as any alternative deposit-related “credit” products (e.g. linked savings accounts)  Banks are encouraged to use “opt-in” approach for all

• verdraft protection products, including ACH and check

transactions

33

OCC Guidance (con’t)

 Banks must conduct sufficient analysis to ensure that customers can manage and repay the overdraft fee  Banks must adopt “prudent programmatic limitations” on the use of overdraft protection, both in terms of total fees and the number of overdraft occurrences

34

OCC Guidance (con’t)

 Like FDIC’s guidance, OCC guidance applies only to automated programs  Significant differences between FDIC and OCC guidance  Not finalized because creation of CFPB

35

CFPB: The New Regulator in Town

 Created as part of Dodd-Frank Wall Street Reform and Consumer Protection Act  Began operations on July 21, 2011  Stated mission is to be the voice of the financial consumer in Washington

36

CFPB (con’t)

 February 2012: CFPB announced the Bureau would begin investigating how to proceed with additional overdraft regulations  Among the Bureau’s concerns: Whether banks misled consumers in 2010 when Reg E was implemented

• Found that opt-in rates differ significantly among banks; questioned

whether banks fairly presented choices

37

CFPB (con’t)

 Requested data from banks about practices and from consumers about experiences with overdraft protection  Deadline to respond to the “public inquiry and industry research study” on overdraft practices was June 29, 2012

38

CFPB (con’t)

 Even before comment period closed, the Bureau issued a proposed “penalty fee box” that would appear on checking account statements  See proposal at: http://files.consumerfinance.gov/f/2012/02/Sample_Fee_Penalt y_Box.pdf

39

CFPB (con’t)

 “Penalty box” at the top of checking statements:

40

CFPB (con’t)

 “Penalty box” at the bottom of checking statements:

41

CFPB (con’t)

 Proposed consumer notice at the bottom of checking statements:

42

CFPB (con’t)

 The proposed penalty box contains more disclosures than the box currently required by Reg DD

• Reg DD requires disclosure of overdraft and NSF fees paid for the

statement period and year to date

43

CFPB (con’t)

 The Bureau has not yet issued proposed rules, but they are expected to draw from both the FDIC and OCC guidance  In particular, it is believed that CFPB will enact substantial limitations to reordering practices  Banks have amended their overdraft practices in response to current regulations and in anticipation of CFPB regulations

• Industry publications indicate that at least 12 large banks continue to

use high-to-low ordering in some fashion

44

What Happens Next?

 MDL 2036

• Parties prepare for remand to trial courts, although

MDL Court’s willingness to suggest remand unclear.

• Mediation and settlement negotiations continue.

 Regulatory Environment

• CFPB is expected to propose additional overdraft

regulations later this year

45

For More Information

 Please contact

• Kenneth C. Johnston (kjohnston@krcl.com)
• David M. Clem (dclem@krcl.com)
• Eliot Walker (ewalker@krcl.com)
• James B. Greer (jgreer@krcl.com)

46

Skadden, Arps, Slate, Meagher & Flom LLP

Bank Overdraft Fee Regulatory Developments

Legal Webinar Group of Strafford Publications Joseph L. Barloon Austin K. Brown

July 18, 2012

Bank Overdraft Fee Regulatory Developments | 48 Skadden, Arps, Slate, Meagher & Flom LLP

Overview

• Regulatory Developments Regarding Overdraft Protection

Programs.

– 2005 Joint Agency Guidance – FDIC Study of Bank Overdraft Programs – FDIC Final Overdraft Payment Supervisory Guidance – OCC Proposed Guidance – Consumer Financial Protection Bureau Inquiry

• Potential Issues in Regulatory Examinations and Enforcement.

– Ongoing CFPB Examinations

• Future of Overdraft Programs.
• Recommendations for Mitigating Regulatory Risk.

Bank Overdraft Fee Regulatory Developments | 49 Skadden, Arps, Slate, Meagher & Flom LLP

Recent Regulatory Developments

• Regulators have been active recently in reviewing overdraft

programs, issuing guidance, and revising regulations.

• Apparent shift in focus from safety and soundness issues to

compliance concerns.

• Recent application of unfair, deceptive or abusive standards

(UDAAP).

• Revisions to regulations have been designed to raise customer

awareness of overdraft terms and conditions and restrict expansion of overdraft programs.

Bank Overdraft Fee Regulatory Developments | 50 Skadden, Arps, Slate, Meagher & Flom LLP

Overview of Regulatory Developments

• February 2005 - Joint Agency Guidance regarding overdraft

programs, including best practices for offering and marketing

• verdraft programs and processing transactions.
• January 2009 - Amendments to Regulation DD require

additional periodic statement disclosures of overdraft fees.

• November 2009 - Amendments to Regulation E require “opt-

in” by customers before a financial institution can assess fees

• n one-time debit card and ATM transactions.

Bank Overdraft Fee Regulatory Developments | 51 Skadden, Arps, Slate, Meagher & Flom LLP

Overview of Regulatory Developments

• November 2010 - Final FDIC guidance on overdraft payment

programs sets forth FDIC expectations.

• June 2011 - OCC proposed guidance describes “the principles

that the OCC expects national banks to follow in connection with any deposit-related consumer credit product.”

• February 2012 - Notice and request for information by the

CFPB on the “Impacts of Overdraft Programs on Consumers.” The inquiry is designed to assess a number of compliance issues relating to overdraft programs, including transaction re-

• rdering, marketing materials, and fees.

Bank Overdraft Fee Regulatory Developments | 52 Skadden, Arps, Slate, Meagher & Flom LLP

Joint Agency Guidance - FIL 11-2005

• Addresses safety and soundness issues:

– Board and management responsibility for oversight – Adequate allowance for loan losses – Charge off parameters – Unfunded loan commitments reported

• Also addresses consumer protection laws, including TILA,

UDAP and ECOA:

– Fairly represent program and alternatives – Disclose fees and demonstrate when multiple fees may be charged

• Guidance sets forth proposed “best practices” and does not

impose regulatory requirements, but agencies have sought to apply guidance as law.

Bank Overdraft Fee Regulatory Developments | 53 Skadden, Arps, Slate, Meagher & Flom LLP

FDIC Study of Bank Overdraft Programs

• Study began in 2006, and the FDIC published the results in 2008.
• FDIC gathered customer account and transaction-level data from a survey of

a sample of 1,171 FDIC-supervised institutions.

• Study focused on information related to:

– Provision of overdraft services on customer accounts – Occurrence of NSF activity covered under automated overdraft programs – Characteristics of customer accounts that tend to incur the highest volume of

• verdraft fees
• Goal of the study was to collect objective information to help policymakers

and the industry.

• Study has informed much of the debate recently regarding expansion of

government oversight and regulation of overdraft programs.

Bank Overdraft Fee Regulatory Developments | 54 Skadden, Arps, Slate, Meagher & Flom LLP

FDIC Study of Bank Overdraft Programs - Findings

• Banks earned an estimated $1.97 billion in NSF-related fees in

2006 (74 % of the $2.66 billion in service charges on deposit accounts reported by banks).

• Customers with 5 or more NSF transactions accrued 93% of

the total NSF fees reported.

• Accounts held by customers in low-income areas were more

likely than accounts in higher-income areas to incur overdraft charges.

• Recurring overdrafts were also more likely among lower

income groups.

• Accounts held by young adults (ages 18 to 25) were the most

likely among all age groups to have automated overdraft NSF activity.

Bank Overdraft Fee Regulatory Developments | 55 Skadden, Arps, Slate, Meagher & Flom LLP

Regulation DD

• Final Rule became effective on Jan. 1, 2010.
• Expanded requirement to disclose overdraft fees on periodic

statements.

• Periodic statements must show and break down by statement period

and calendar year-to-date:

– Amount of overdraft fees – Amount of returned item fees

• Added format requirements to make information about overdraft and

returned-item fees more effective and noticeable.

• Required account balances disclosed via automated systems (ATM,

internet, telephone) to exclude “padded balances” or additional funds institutions may make available through overdraft programs.

Bank Overdraft Fee Regulatory Developments | 56 Skadden, Arps, Slate, Meagher & Flom LLP

Regulation E

• Final Rule became effective on July 1, 2010.
• Required banks to provide consumers with the right to “opt-in”
• r “affirmatively consent” to overdraft services for ATM and
• ne-time debit card transactions.

– Prohibits overdraft fees for ATM and one-time debit card transactions unless consumer is given notice of financial institution’s overdraft service and consumer affirmatively opts in

• Consumers may opt in at any time and revoke opt-in at any

time.

• Does not address overdrafts for non-electronic (i.e. paper

checks or ACH transfers) transactions.

Bank Overdraft Fee Regulatory Developments | 57 Skadden, Arps, Slate, Meagher & Flom LLP

FDIC Final Overdraft Payment Supervisory Guidance – Nov. 24, 2010

• Supervisory guidance designed to “assist FDIC-supervised

institutions in identifying, managing and mitigating risks associated with overdraft payment programs, including risks that could result in serious financial harm to certain consumers.”

• Reaffirms existing supervisory expectations and provides

specific guidance with respect to automated, as opposed to ad hoc, overdraft payment programs.

• Sets forth “best practices” for FDIC-supervised institutions.

Bank Overdraft Fee Regulatory Developments | 58 Skadden, Arps, Slate, Meagher & Flom LLP

FDIC Final Overdraft Payment Supervisory Guidance

• FDIC expectations are outlined in the Guidance and the Staff

FAQ:

– Minimize potential consumer confusion in marketing and disclosure materials and promote responsible use – Monitor for excessive or chronic use

• Institutions are expected to contact customers, provide notice of available

alternatives, and offer clear mechanisms for customers to select alternative products

– Establish de minimis thresholds before fees are assessed

• Staff FAQ includes an example of a $10 de minimis threshold

Bank Overdraft Fee Regulatory Developments | 59 Skadden, Arps, Slate, Meagher & Flom LLP

FDIC Final Overdraft Payment Supervisory Guidance

• FDIC expectations, continued:

– Establish daily limits on overdraft fees

• Staff FAQ suggests no more than three transactions subject to fee per day

– Establish “reasonable and proportional” overdraft fees

• Overdraft fees should not be significantly greater than the amount of the

underlying transaction

– Ensure that transaction posting order does not maximize fees

• Utilize neutral processing order, i.e. in the order received, by check

number, based on serial number sequence

Bank Overdraft Fee Regulatory Developments | 60 Skadden, Arps, Slate, Meagher & Flom LLP

OCC Proposed Guidance

• Proposed guidance states that the OCC is concerned with

certain overdraft program practices, including:

– Potentially misleading marketing statements – Failure to assess customers’ ability to repay overdraft advances before advances are made available to the customer – Failure to identify excessive usage – Maximizing revenue based on payment processing order

• Guidance has not been finalized.

Bank Overdraft Fee Regulatory Developments | 61 Skadden, Arps, Slate, Meagher & Flom LLP

CFPB Notice and Request for Comment

• In early 2012, the Bureau issued a Notice and Request for

Comment relating to “overdraft programs and their costs, benefits and risks to consumers.”

• The Bureau’s inquiry is focused on:

– Transaction re-ordering that increases consumer costs – Missing or confusing information, unclear terms and disclosures, and information about alternative programs – Misleading marketing materials – Disproportionate impact on low-income and young consumers

• According to the Bureau, its inquiry is based on regulatory

authority under the Electronic Fund Transfer Act (EFTA) and Truth in Savings Act (TISA).

Bank Overdraft Fee Regulatory Developments | 62 Skadden, Arps, Slate, Meagher & Flom LLP

CFPB Notice and Request for Comment

• In connection with the inquiry, the Bureau sought information

from the public on a number of topics, including:

– Alternatives to overdraft programs – How overdraft scenarios are communicated to consumers – Reordering practices – How changes to Regulations DD and E have affected overdraft programs – Fee assessment practices and revenue to institutions

• Notice cites 2008 FDIC study results.
• Comments were due in June 2012.
• Bureau will likely issue a report late this year or early next
• year. Findings could result in additional regulation.

Bank Overdraft Fee Regulatory Developments | 63 Skadden, Arps, Slate, Meagher & Flom LLP

Other CFPB Initiatives

• Bureau is also collecting data from several large banks and will

evaluate how those institutions’ overdraft policies affect consumers.

• Information collected will be used to assist the Bureau with

policymaking on overdraft practices and prioritizing its own regulatory and education work.

• Bureau has also sought public input on a prototype penalty fee

box that would be included with customers’ checking account statements.

– Format appears to be designed to encourage customers to consider alternative products

Bank Overdraft Fee Regulatory Developments | 64 Skadden, Arps, Slate, Meagher & Flom LLP

CFPB Examinations

• Bureau has focused on overdraft programs during

recent compliance examinations.

• Issues include posting order, fee assessments and

disclosures.

• Any enforcement orders against individual institutions

will likely affect the entire industry.

Bank Overdraft Fee Regulatory Developments | 65 Skadden, Arps, Slate, Meagher & Flom LLP

Implications of CFPB Actions

• Posting order and transaction reordering issues are particularly

important to the Bureau.

• Significant focus on fees and how fee revenue is used by

financial institutions.

• Bureau appears to view bank and lender practices through its

power to ban “unfair, deceptive, or abusive acts or practices” (UDAAP).

• Abusive practices have not been formally defined by the CFPB,

but how the Bureau addresses overdraft fees will provide insight into how it views its UDAAP authority.

Bank Overdraft Fee Regulatory Developments | 66 Skadden, Arps, Slate, Meagher & Flom LLP

Common Practices That May Be Affected by Recent Regulatory Scrutiny

• Charging a static fee for all overdrafts, regardless of the amount
• f the overdraft.
• Automatic enrollment in overdraft programs for checks and

ACH transactions.

• Charging multiple overdraft fees in a day.
• Reordering transactions to high-to-low dollar amount.
• Waiving overdraft fees for certain customers (fair lending

issues).

Bank Overdraft Fee Regulatory Developments | 67 Skadden, Arps, Slate, Meagher & Flom LLP

Future of Overdraft Programs

• Regulatory uncertainty will impose significant costs on

institutions as they seek to conform programs to vague standards.

• Institutions will continue to eliminate services, including free

checking and free checking bundled products, to make up for decrease in overdraft revenue.

• Tension between regulator concerns and consumer conduct.

– Customers, through opt-in process, have made it clear that they want overdraft protection programs – Battle of surveys and account data

• Reduction in overdraft services may drive consumers to more

risky non-bank alternatives.

Bank Overdraft Fee Regulatory Developments | 68 Skadden, Arps, Slate, Meagher & Flom LLP

Future of Overdraft Programs

• Continued focus on UDAAP and fair lending issues.
• Disclosures will become more detailed, and affirmative consent

for all forms of overdraft protection (e.g., checks/ACH) is possible.

• Potential for additional restrictions on number of overdraft fees

in a day.

• Increased scrutiny of transaction posting order.
• Tighter controls on when overdraft items may be paid (rather

than returned) by institutions.

Bank Overdraft Fee Regulatory Developments | 69 Skadden, Arps, Slate, Meagher & Flom LLP

Recommendations

• To date, agency guidance does not set forth any legal

requirements, although examiners evaluate compliance through lens of guidance during examinations.

• Follow agency guidance as closely as possible to

minimize risk.

• Anticipate additional scrutiny of transaction ordering

and fee assessments.

Bank Overdraft Fee Regulatory Developments | 70 Skadden, Arps, Slate, Meagher & Flom LLP

Recommendations

• Review disclosures to ensure that they accurately and

completely describe overdraft programs.

• Evaluate whether customer access to overdraft protection

should be tightened.

– Consider requiring opt-in for check and ACH transactions

• Review manual overdraft practices, including overrides of

automated decisions, for potential fair lending risk.

• Stay alert for and carefully review agency statements or

public enforcement orders regarding overdraft programs.

Bank Overdraft Fee Regulatory Developments | 71 Skadden, Arps, Slate, Meagher & Flom LLP

• OCC et al., No. 05-03, Joint Guidance on Overdraft Protections Programs (2005).
• FDIC, Study of Bank Overdraft Programs (2008).
• Truth In Savings, 74 Fed. Reg. 5,584 (Jan. 29, 2009) (codified at 12 C.F.R. Part

230).

• Electronic Fund Transfers, 74 Fed. Reg. 59,033 (Nov. 17, 2009) (codified at 12

C.F.R. Part 205).

• FDIC, FIL-81-2010, Overdraft Payment Programs and Consumer Protection - Final

Overdraft Payment Supervisory Guidance (2010).

• FDIC, Overdraft Payment Program Supervisory Guidance - Frequently Asked

Questions (last updated Apr. 1, 2011).

• Guidance on Deposit-Related Consumer Credit Products, 76 Fed. Reg. 33,409

(proposed June 8, 2011).

• CFPB, Impacts of Overdraft Programs on Consumers, 77 Fed. Reg. 12,031 (Feb. 28,

2012).

Rules and Publications Cited

Bank Overdraft Fee Regulatory Developments | 72 Skadden, Arps, Slate, Meagher & Flom LLP

For more information, please contact: Joseph L. Barloon (202) 371-7322 Joseph.Barloon@skadden.com Austin K. Brown (202) 371-7142 Austin.Brown@skadden.com